WSJ: Guitar Center to be acquired by its major creditor

Eric Garland Guitar Center, Retail Trends 30 Comments

Oh, Guitar Center. Back in November. I wrote a casual post about how their junk bond status would mean the company wasn’t doing great, much in the way that when your car is repo’d, you’re not too wealthy. It went viral. 150,000 views in five days.

Their executives and employees protested. Oh, how they protested. They hatemailed. Crawled onto my site pretending not to be from GC. (Look down the comments section, it was epic.)

A Vice President from the company emailed me that I had written “the most ignorant blog post of the year,” (quite a feat!) one that was full of “absurd claims about our organization that couldn’t be more inaccurate.” You know, the ones that came from Wall Street ratings agencies and got reported in Reuters. That their debt was unmanageable, which anybody with nine seconds of training in corporate finance could see.

Fast forward past the Christmas season.

I have yet to get an insider view of the organization, but according to the Wall Street Journal, their major creditor is trying to convert its risky debt into ownership, likely so they can get something for all that gear in the warehouses.

Ares Management LLC, which owns the majority of the music retailer’s debt, is in advanced discussions with Guitar Center owner Bain Capital to take over the company, people familiar with the matter said.

The two investment firms are in the final stages of hashing out a deal to convert the Guitar Center debt that Ares owns to equity, a process they are trying to complete outside of bankruptcy court while also keeping valuable tax breaks, the people said.

Under the terms being discussed, Bain would keep a minority stake in the company, some of the people said. The exact size wasn’t clear.

Guitar Center has about $1.6 billion in debt, much of it stemming from Bain’s $2.1 billion leveraged buyout of the company in 2007. But the 253-store U.S. chain faces competition from e-commerce, and debt payments are eating into its cash flow, the people said.

I said that the debt-laden big box model was not built for the long term. I stand by my assessment. The events are playing out to make my point for me.

If CEO Mike Pratt wants to come back to this blog to make a comment, like he did last time, I welcome him with open arms.

In the mean time, you should think about the future of local retail – the kind that doesn’t end up billions in debt. It may have quite a future.

  • ff

    Ah Bain Capital, we’ll take your money and screw you over.

  • Eric Cavanaugh

    I’ve had good and bad experiences at GC. Mostly good. Overall I’d give them a B+. But they tried too hard to be Wal-Mart and well, Amazon is eating everyone’s lunch. It is the 21st century. I think it is more than a “catalog with walls.” Catalog’s don’t let you play OPG’s. As the Manager of a GC in town I once lived said, “When I bought my Les Paul I tuned up 11 of them and played them all to pick out the one I wanted.” You cannot do that with a catalog. But in the same medium sized town (12th in US population) there used to be 5-6 music stores. And maybe 3 of those were good ones. When I moved away there were two big boxes. Sam Ash, and Guitar center. I think they just over reached. There isn’t enough market for all 253 stores to make bank. Maybe once there was? But I think about Wal-Mart over buiding stores to crush their competition. That seemed to work for them. But I feel they are two very different markets and products.

    • Sammy Reynolds

      Walmart and GC are two totally different business. Walmart sells products the majority of people in the country needs. GC doesn’t.

      • Eric Cavanaugh

        Yes, my point is there appear to have tried to adopt Wal-Mart’s model for building too many stores and it doesn’t work for precisely the reason I outlined and you reiterated. “I feel they are two very different markets and products.” Reading, still fundamental.

  • I’m disappointed I had been accused of β€œthe most ignorant blog post of the year,” by another brand, seems you stole my crown! Good work, the world needs bloggers with balls.

    • The race for most ignorant blog post of the year is one of the most intense in the world. I’d like to thank my Mom, my agent and crystal meth for making it all possible.

      • John F. Hendry

        LOL…. but don’t let it go to your head Eric, I’m right behind you relative to your frame of reference in time unless the DOE funding SLAC’s challenge to CERN’s loose cable using their BaBar data that resulted in a sigma 14 discovery showing time has asymmetry is wrong and there’s no such thing as gravity and the laws of physics musicians use with deep awareness embarrassing the physics world as you read this in their search for “dark matter” caused by observing the harmonic octave structure of space.

        I don’t know much about the politics behind Guitar Center’s problems but I have friends that work there I respect a great deal and understand the danger of greed ruining everything Man has achieved. My experiences with Guitar Centers throughout the US have overall exceeded the quality of service I have received from any other music retailer and I hope they pull out of this as we need hands on evaluation buying music equipment. And when it comes to string instruments like a buying guitar nothing is more important as I can’t see buying a guitar mail order without playing it to check it out first.

        BTW if you didn’t understand the first sentence related to music theory, in September 2011 CERN announced worldwide that manmade muon phase neutrinos were measured traveling at (v-c)/c=2.48e-5 sec exceeding the speed of light by 2.48e-5 sec in 453.6 miles as CERN’s simple equation shows. If the data was correct then CERN had made the most important discovery in the history of Man because it challenged Einstein’s most basic and fundamental law of relatively that states the speed of light cannot be exceeded by any amount whatsoever. Shortly after the announcement posts went up on Nature’s Forum where CERN scientists and the public were discussing the “impossible” announcement showing in 453.6 miles Stanford’s SLAC E158 weak force asymmetry data matched CERN’s neutrino data in the forward arrow of time @ 2.48-e-5 sec proving the data was correct, but also showing why the speed of light was not exceeded which is an observation dealing with the photon that goes back to the 40’s and has been “silently” argued ever since with stunning experimental results using more modern equipment showing the same gain in time.

        CERN’s neutrino data meticulously collected over two years had accidently shown the relationship of the neutrino acting as the photon’s “quasi” antiparticle. And SLAC’s E158 data was used to show the gain in both time and space added was caused by two harmonic commas created at the speed of light adding to it, not exceeding the SOL, showing space is forming in a harmonic octave structure explaining the illusion of dark matter and energy the measurements of galaxies have created without applying the basic laws of physics that create music theory. But most importantly the addition of SLAC’s E158 data exposed an asymmetry in time responsible for the geometry creating the force of gravity in two dimensions and a second reverse arrow connected to time proven to exist by the .20e-5 sec asymmetry created adding the “missing” graviton (misnamed the “hole” opposite the electron) to the atom required for anything oscillating in space Einstein showed is relative to time. What goes up, must come down, and as every child is taught in their first music lesson…. “this is up, this is down, lets go up and down” has specific timing attached to the movement’s pattern in tonal space. The uncertainty of the “dice” Einstein refused to accept were turned into dust replaced by two harmonic commas connected to a second reverse arrow in time needed for entropy to make sense of information created by time adding a 4th Mass oscillation phase to the atom.

        To say physics was changed overnight using basic music theory is a gross understatement as every major mystery in physics from dark matter to antiparticle-particle asymmetry SLAC’s BaBar experiment had investigated was instantly explained by adding gravity to a new standard model based on correcting the original Circle of Fifths resulting in the New Circle of Fifths some of Guitar Center’s employees have seen and are aware of like other musicians that have “tested” it.

        As you probably know after the E158 data was shown to match CERN’s muon neutrino data CERN unaware of their data’s relationship to past photon measurements, CERN changed the original harmonic comma value announced and stated the 2.48e-5 sec measurement was an error caused by a “loose cable” turning off the worldwide attention focused on the faster than light neutrino anomaly. However physics is conducted through the funding of great amounts of money based on successful research and SLAC did not sit by seeing their data match CERN’s data and funded through the DOE went back over SLAC’s older BaBar experiment’s antiparticle data and detected the asymmetry in time using a new set of eyes and announced the discovery a year later giving it a sigma 14 level of certainty, “far more than needed to make a declare a discovery”.
        So there is more going on in music than most people realize showing Guitar Center is in a better position than it appears. But it’s one thing to change physics overnight, and another thing to change Human Nature responsible for another World War that must be avoided so as not to prove Einstein and his fellow scientists who warned us correct. But by weight the responsibility of the outcome lies at the top by those that must accept the laws of physics now prove through the fine structure constant that Freewill is a product of asymmetry and follows the path of greatest increase powered by energy following the path of least resistance showing greed is a double edge sword to swing very carefully. We have much bigger problems to face dealing with Nature than ourselves fighting over the tools of pleasure and it’s time to realize that as we witness rocks miss the Earth while hitting other planets with such energy it would destroy the Human Race in a blink of an eye destroying all we have achieved with no guarantee Nature can repeat the feat in time before another catastrophe sends our atoms right back where they came from…. something so horrific connected to the reality of Mass and time it is almost beyond comprehension. Something so real that it must be avoided at all costs. So feel free to pass this information around.

  • 1voice111

    I am amazed. the evenings which I visit local suburban GC in pricy-real-estate San Mateo, it is a virtual ghost town. I usually encounter 1-2 (potential customers) and 10-12 employees on the floor…. rarely see any major purchases , I estimate that store overhead = $300-600 / hr (minimum wage per employee… rent (40-45 sqft).. utilities… inventory }…. what am I missing?

    • Dan Perez

      They don’t have to pay minimum wage. They pay commission on draw, so whatever minimum wages get paid out during the down times, the employees have to pay back out of their sales commissions. “I owe my soul to the company store…”

      • 1voice111

        I understand commission fade, but when there are 3 times more sales “associates” than customers, very little (if any) commission is being made. of course GC will blame the sales guys, but how can you sell to an empty room ?

        • Dan Perez

          I dunno, the one by me is always packed when I go in.

        • Charles Mumford

          More typical of my experience is too few salespeople and too many customers, so you can’t get service unless you look serious about buying.

  • pgorges

    You’re doing ok on reading writings on the wall, but you draw the wrong conclusion. Thomann owns the market in Europe (they make about 650 mio $ in revenue) without a single local store. Go check, see why, and try again.

    • Thanks for the comment.

      You do realize that in America, “local” or “regional” can be equivalent to several European countries at once, right? The US musical instrument market is roughly $7 billion – Guitar Center occupies fully $2 billion of that per year. That’s three Thomanns. Disperse that throughout the MI market and you’ve breathed new life into hundreds or thousands of new businesses likely to take special tastes into account. There may be dominant online retailers in the US a la Thomann – Amazon comes to mind. (I’ll save you the Google: $75 billion in revenue.) Moreover, brick and mortar stores will almost certainly be reduced in MI and every other retail sector – America has fully ten times the retail square footage per capita of Europe, so this bubble will pop.

      Music, though, tends not to be like consumer electronics or apparel. Shipping is a risk to the merchandise and consumers have quirky tastes best explored in person, which is why brick and mortar has lasted this long. While the private equity roll-up model of structured finance is cooked – my real point – the survivors will be those who create something unique and valuable that can survive the Thomanns and Amazons of the world.

      Go read Doug Stephens’ excellent new book “The Retail Revival.” His argument dovetails with mine, and he explains his thesis with rigor and vivacity.

      Thanks for reading.

      • pgorges

        Thanks Eric. You bring up valid facts, but I still think e.g. The Retail Revival – does not apply to the largest part of the MI business, although we all wish it would. I rubbed my nose at the storefront of our local music dealer when I was 6, and I do miss that experience. Those stores are gone – and while they were still around, people would only go there to try guitars, only to go home and order them at Thomann. I would bet that if Thomann bothered to dominate the world with their model (they don’t), they would. There is no typical European way of buying music products that they cater to. I’ve worked in the MI industry in the US and Japan and can’t see cultural or geographical differences in musician’s buying behaviors. Thomann provides an Amazon-and-then-some experience at unbeatable prices with a strong focus on in-person support, and they believably claim they are passionate musicians too. And they’re private, and comparably tiny – they probably have one employee per mio $ in revenue. They’re not a quarterly-results-driven behemoth owned by Bain. They have virtually eliminated brick and mortar stores, and let’s not assume those didn’t try to fight. A grandmother buying the first 50$ guitar-with-songbook for her grandkid goes to Thomann these days. I can’t claim to fully grasp what they’ve done right, but I know them a bit because I’ve done business with them, and I can only recommend to study them to anyone who wants to understand how music product buyers are wired.

        • Fernando Kijel

          I don’t know what they do right, but I do know what keeps me coming back to them for business (and I’ve purchased from them 5 or 6 times in the last 2 years). It seems to be the same set of factors that bring me back to Amazon every time I look for books, films or CDs: a very large assortment, good product info, and very good prices. And the cherry on top is excellent customer service. Even if you don’t need them, they’re just a phone call away, and you can expect that their reply will be exactly what you’re expecting (OK, that’s not the same thing as Amazon). The only missing piece in this equation is the possibility to try the products out (they offer a 30-day money-back guarantee instead).

          Which brings us back to Eric’s hypothesis: there’s still a niche for brick-and-mortar. Their challenge to meet with success will be to find how to better exploit the opportunity: is it catering to special tastes ? Is it offering both new and used ? Is it incorporating the user/customer into a more integral shopping experience ? My local shop seems to have found a good angle: they offer any instrument for sale under a lease programme as well. If you’re not sure that the new Yamaha electric drum is the thing for you, you can lease it for a month. Or 4. Or 8. If you lease it long enough, you’ll end up owning it. And if you’re a loyal customer and they know you, the even lend you stuff (I borrowed a small practice 120W bass amp combo, that I ended up buying). The success factor for the next generation of brick-and-mortar stores that want to survive might be in their ability to tailor their product and services offer to their local musician’s community.

      • Charles Mumford

        I bought a new bass guitar last year. I did my research online and narrowed it down to three instruments. None of the Guitar Centers in my area (Los Angeles) had ANY of them on the wall. I had to pay in full up front to order them, come back and pick them up, then test them out at home back-to-back and then return the two I didn’t want for a refund.

        How is this a workable economic model for either the consumer or the business? Or the sales people, none of whom made a commission off my purchase?

        The majority of the music gear at GC is low-end, high-margin junk. The remainder is mostly rich, middle-aged men’s replicas of famous guitars. Maybe stocking less depth and more breadth would help? It would have helped me, but I suspect the issues GC is having stem more from the structure of the company financials (which trickle all the way down to the consumer) than from the lack of selection in their showrooms.

        And no smaller retailers in my area had any of these instruments, either, so in this case, local/independent stores would have fared no better.

  • Burt Firks

    It’s all in the name “GUITAR Center”. Listened to the radio much lately? How much guitar music do you hear? As a guitarist, I have thought for a long time that there is just not enough interest in guitar playing to support GC in the long run. Maybe if metal and hard rock came back into vogue in the mainstream, things could get better for them. Not that they don’t sell all the other goodies too, synths and stuff, but guitars are their bread and butter, and not as many kids are picking it up as have been in the 60’s-late 90’s. Rock is dead. Maybe they should shift their focus to “Sampler and production station Center”, put all the Gibsons and Fenders and such in a little corner upstairs, where the synths are now. It’s too bad, in a way, because, as a wise man once said, “Only an imbecile buys an expensive musical instrument without getting the opportunity to play it first.” When I bought my Les Paul Goldtop from them, I played my way through the whole wall of LP’s, just about. When I picked my winner, several salespeople were bummed, and said that was the one they wanted. It was the best one in the store. Every one is different. Just like snowflakes. πŸ˜‰

    • 1voice111

      Guitar center started out as “organ center” mainly selling cheezy electric organs…… remember that craze? if not go to your local salvation army store to see these dinosaurs!

    • LM

      Sorry man guitars are still on the market. I’ve never made so much money giving guitar lessons in my life, and I’ve been teaching professionally for 14 years. Instrument sales are up right now. Way up. This has nothing to do with that. This has to do with an over-bloated company hiding its debt and simultaneously changing the buyers’/sellers’ market so distinctly that many of the old ways of producing quality instruments are in danger of becoming entirely extinct. Is your new $3000 Gibson made to last? Probably not. Why not? High demand makes for high-speed manufacturing, which makes for production lines in order to meet the bottom line, which makes for the end of what used to be an amazing, American, hand-crafted industry. That kind of craftsmanship is now largely available only to elite buyers who can shell out for boutique brands. But the original Fenders were actually the company’s ‘discount’ line, and boy were they made to last! Not anymore. Not like Guitar Center is solely responsible, but their skewing of the supply/demand chain for instruments purely as a debt shield is pretty disgusting. Shame on Bain.

      • LM

        As an addendum to that, any average Joe knows most of GC’s real money is in pro audio/samplers/DJ kits etc. Also, not that I’m particularly nuts about what she does, Nuno Bettencourt is touring with Rihanna right now, and that gig about as top-of-the-market as you can get with a guitar these days. Rock and roll has not died, will not die, will never die. It just changes shape, and little kids are still finding AC/DC on YouTube and asking their parents for that first guitar as a birthday present every year, without fail πŸ™‚

      • John F. Hendry

        Well said LM and glad to hear your music lessons are going well as you have a real “heavy” surprise coming your way with time. What you said about guitars: “the old ways of producing quality instruments are in danger of becoming entirely extinct” has already happened with keyboards. And the quality issue goes for everything from expensive keyboards without after touch that would have been unheard of producing 25 years ago to TV’s that’s color bit depth, what creates a good 3D image like a vinyl record produces a good tone, is below an old picture tube set where we see Man’s potential to create the best he can is being replaced by growing technology used to make money instead where 10v caps are seen on 12v rails in products lucky to make it past their warranty period hiding technology’s true potential to create amazing mind blowing products that last. At least guitarists have boutique brands. Infinite Response shipped the last VAX77 on October 14, 2013 after showing a superior midi controller with polyphonic after touch and release velocity using modern technology could be built by a small company in Texas instead of the bland rehashed non-responsive old ideas offered where often the quality is missing just so they can put it back in the next “improved model”. Sad….

        • Nailman

          I think the comparison between keyboards and guitars is apples and oranges. I don’t know anything about keyboards, but the quality to price ratio for guitars is the best it’s ever been.

          • Agreed. I started playing guitar in 1986, and what you can get for $400 now has no bearing on what was available back then. And basses? OMG, the quality and variety being sold at low price points now are light years beyond what was coming out 25 years ago. Then there’s low-weight 500 watt amps, powered speakers, boutique everything…

            It’s a golden age for gear.

      • Nailman

        Glad to hear the lessons are thriving! Rock is still relevant, and also consider that country is huge, and still guitar driven.

        While agree the guitar market is still strong, I very much disagree on your conclusion of declining quality. In fact, the opposite is true. CNC has taken consistency to a new level, while reducing cost. While most the Indonesian and Chinese guitars are not that great (although you can find
        good ones if you look hard enough) because they are built to a low price point, the Korean guitars are very good. Most the current Korean guitars in the $600-1000 range are better built than vintage and current US production guitars, in terms of fit, finish, consistency and overall
        build quality. The hardware is high quality too, I don’t anything indicating they are not built to last. I base this on my experience of being a pro repair tech and product designer for over 25 years, who has also bought and sold vintage guitars for a living.

        As far as GC’s future, if they go down IMO it will be because of their financial structure and/or too many locations in markets too small to suppport them.

  • Dan Perez

    The issue is not that guitars aren’t selling. Read, people! The issue is that Bain Capital made a leveraged buyout with GC’s own money, putting GC into debt while skimming the profits off the top for Bain. Remember when Romney ran for president and people said he was a corporate vulture? This is what his company does. They buy up other companies, take the profit, then make the smaller company pay back the debt, which usually it can’t. Then they dump their acquired company and let it die while they move on to the next victim, er… purchase.

  • John F. Hendry

    Rock is not dead…. it’s just getting started powered by gravity. But if we don’t wake up we will be lucky to have the quality available 35 years ago in music equipment as money seeking profit drives what is available. Some “pro” keyboard player don’t even know what polyphonic aftertouch and release velocity is anymore…. available in the late 70’s and early 80’s.

  • 1voice111

    Looks like GC is playing with the numbers, and got caught with their fingers in the “cookie jar.”….see last 2 filings … here !….,-INC.


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